Gold may lose some shine; prices to fall towards $1,250 level in medium term

The yellow metal has made a good start to the year, as the prices rose around 3.5 per cent in January — its third consecutive month of gains — and the biggest monthly increase since August 2017.

Prices fell to a low of $1,300 per ounce and rose to high of $1,366. The commodity finally settled at $1,344.7. On MCX, gold prices rose 3.3 per cent last month, closing at Rs 30,117 per 10 grams. On a YtD basis, gold prices have gained 1.2 per cent in the international market, while MCX gold prices have gained 2.9 per cent during the same time.

2018 would be the year for a stronger dollarIn the US Fed's last meeting (Jan-30-31), they left the key rates unchanged, while its message on inflation signalled it was on track to raise borrowing costs in March under incoming chief Jerome Powell.

Moreover, comments from US Treasury Secretary Steven Mnuchin gave dollar bears a boost in the last month, endorsing a weak US currency, although Trump later tried to row back from those comments saying 2018 will be the year of stronger dollar.

Talking about investment demand, SPDR gold trust has seen an outflow of around 10.6 tonnes since Jan 2018-till date, and the current holdings as on February 7, 2018 stands at 826.9 tonnes. On the other hand, speculative flows into the commodity has increased last month from net longs of 109,919 contracts as on December 31, 2017 to 214,595 net longs as on February 4, 2018, resulting in increased gold prices last month.

Economic data sets point towards growth storyThe optimism in the labour market is a testament of the fact that the jobs addition is happening smooth with the labour (Non-Farm Payrolls) data released on February 2, 2018 punching in job additions of 200,000 compared with 160,000 job additions the prior month.

The consumer confidence index also shows an optimistic tone with the latest number as on January 31, 2018 punching in a number of 125.4, the highest in the history of the US.

OutlookRevival in dollar would be the theme going forward in 2018, with tax cut implementation by the US President, the commentary on the infrastructure story as promised, optimistic economic indicators clearly set the tone for fall in gold prices from a three month perspective.

Moreover, the Fed rate hike possibility of around 95 per cent as per Fed watch tool will also have its own share of impact on the fall in gold prices.

We expect gold prices to move lower towards $1,250 from a three-month perspective, while MCX gold prices will move lower towards Rs 28,800 in the same time frame.

(Prathamesh Mallya is Chief Analyst, Non-Agri Commodities and Currencies at Angel Broking. Views expressed in this column are his own and do not represent those of ETMarkets.com. Investors should consult their financial advisers before taking any investment calls based on this article)

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